Will Germany Help Lead International Markets Higher?

With the start of 2015 we have begun to see movement in international markets after the focus has been squarely on U.S. equities over the last two years. After the first few weeks of January, international markets have put in a stint of outperformance relative to U.S. indices. When this begins to happen I like to find some of the stronger markets among the international group. To do this we can use the Relative Rotation Graph (RRG) which measures the relative performance of a set of ticker symbols relative to the S&P 500 ($SPY) while also measuring the momentum of that relative performance.

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Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Why 2015 May Not Be A Lock For the Bulls

With 2015 being a pre-election year many traders and market commentators have all assumed this year will be a lock for the bulls. Historically pre-election years have been very strong, having not experienced a down year according to the Stock Trader’s Almanac (STA) in the last 75 years. The reason for excessive bullishness is often rooted in the belief that the sitting president will do all he can to bolster economic growth and consumer sentiment going into the following election.  Since 1931, January has historically been one of the strongest months in a pre-election year, and so far in 2015 January is down nearly 2%. Is this a bad sign for things to come if January doesn’t pick up its performance?

Last November I wrote a post “A Unique Seasonal Study to Forecast 2015 Returns.” In that post I highlighted the work done by Wayne Whaley who won the 2010 Charles Dow Award by the Market Technician Association. As we finish the period of time that Wayne designates as a good predictor of up and down years for the S&P 500, historical data doesn’t fare well for 2015.

Looking at the data by Whaley of years that have seen his specified time period go negative, which includes 13 years since 1950, only four were followed by positive returns for the S&P 500. Whaley also notes that ten of the twelve negative Nov-Jan periods saw at least a 12% drawdown during the year. However it’s important to note that none of these years were also pre-election years.

negative TOY years

For 2015 we have a unique situation where the Nov 19th-Jan. 19th period was negative but the first five trading days of January resulted in a positive return. According to the STA, over the last 41 years, 85.4% of the time the market has been positive when the first five trading days also produced a positive return. When we look at pre-election years using STA’s data, 12 of the last 16 followed the pattern (positive or negative) of the first five days of January, with a recent exclusion of 2011.

If we were to look for years where Whaley’s time period of Nov-Jan was negative and the first five days of January were positive, since 1950 there have been just three such years. Of those three years two were negative, 1990 and 2002.

neg TOY pos Jan

What about the decennial cycle, in which we look at the returns of years ending in 1, 2, 3, 5, 6 and so on? Year 5, wherein 2015 would be included, has been quite strong – up 83% of the time with an average return of 21.5%!

Going into 2015 we have only had two instances of six or more straight positive years going all the way back to 1835, the last occurrence being ’91 to ‘99 during the dot-com bubble. If the bulls are able to pull it out and keep ’15 in the green then this will only be the third 6+ year streak in 180 years.

Confused yet? There’s a decent amount of contradicting data for how 2015 will play out and I suppose that’s not a bad thing, as it prevents the breeding of overconfidence. Nothing has a perfect record and anything that does will eventually have its first incorrect forecast at some point sooner or later.

Where will 2015 end? I have no idea, but I find myself leaning more towards Whaley’s research and would not be surprised if we saw just a low single digit if not a negative return for the year. With the analysis that I do for the firm I work for, I allow price action to lead my bias. We’ll see what price action does over the coming 11 months and if another notch gets added for Whaley’s study or if the pre-election and start of January hold true as being historically bullish.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 1/12/2015

Well this has been an interesting start to the new year. Just about every major news source has spilled ink on the ‘January effect’ and the impact of a down start of a year has on the performance for the year as a whole. In November I wrote about the predictability the time period between November and January had for the following year and that history has shown it to be a better indicator than simply monitoring January or the first five days of January. While there’s still another week left for this method, it’s currently showing a negative performance which is not positive for 2015 as a whole. But this week’s price action could reverse that and it’s something I’ll be keeping an eye on.

Trend
The trend of the S&P 500 ($SPX) remains positive as the recent short drop was ended with a higher low in price as the 100-day Moving Average acted as a low point. We’ll see if price is able to take out the prior January high and keep the up trend intact.

trendBreadth
While at the prior January high we saw the Common Stock-Only Advance-Decline Line break above its prior high, it has now gone back under the peak. However, like price it made a higher low on the recent drop. The Percentage of Stocks Above Their 200-day Moving Average remains in a clear down trend.

breadth

Hedge Funds Become More Gloomy
While hedge funds have struggled to shine like the bright star they believe themselves to be; according to a survey of 200 funds by Aksia as reported by the WSJ, they don’t have high hopes for equities in 2015. Over 70% of those surveyed do not expect returns to exceed 10%, potentially ending the streak of double-digit gains for the S&P 500.

Hedge fund WSJ

Yield Curve
As the yield curve has continued to seek out lower lows in 2015, following the pattern of 2014, this could have implications for the financial sector ($XLF). We typically see financials outpace the S&P 500 in a rising yield curve environment. The sector broke this trend after the relative performance bottomed in November and began to outperform the major index while the yield curve itself headed lower. However, this breakaway has since reversed recently with $XLF taking some punches over the last week while the S&P rallied.

yield curveMomentum
In the last Technical Market Outlook  I noted the negative divergence that had been taking place between the S&P and momentum. Price began to drift lower after that point and while the equity index has yet to regain its prior high, neither has momentum.

momentum

Gold
While the focus has been on oil over the last several months, Gold ($GC_F) has been consolidating on the weekly chart. After temporarily breaking below the 2013 lows, gold has risen back above and trying to hold $1,200. Momentum, specifically the Relative Price Index (RSI) and MACD indicators, have created positive divergences with the test of the prior lows. I’m watching to see if gold can get back above $1,250 and momentum continue to gain ground as buyers step back in.

goldCorn
I last wrote about corn in October, “Are Corn Prices Poised To Rise?” showing the break of the declining trend line, the commodity entering a bullish period of seasonality, and the low-level of sentiment. Since then we’ve seen corn prices continue to rise, with the Corn ETF ($CORN) testing $28. The Relative Strength Index (RSI) is now in a channel as price begins to weaken. I’m watching to see if momentum can break above or below its channel lines and if price can hold above its short-term low just above $26.

corn

Year-to-Date Sector Performance
As 2015 gets started the relative performance of the nine S&P sectors already looks like a repeat of ’14. Health Care ($XLV). Consumer Staples ($XLP), and Utilities ($XLU) have led for the first eight days of the year. While Energy ($XLE) and Financials ($XLF) are the worst performers so far this year.

YTD sector

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.